SOFT DRINKS Bottled up?

“Pepsi Foods submits a new set of proposals to the governmentÂ and prepares to face competition from Coca-Cola “

Four years after Pepsi came to India, it isn’t sure if it made the right choice of terms and conditions. Under pressure from the government, the company finds itself bottled up by the clauses of its original agreement, while its rivals threaten to eat into its share of the rapidly growing food-and drink market.

Beginning next summer, Pepsi will have familiar company Coca-Cola-who will add a third dimension to the formidable competition between Pepsi and Parle in the Indian soft drink market. Pepsi Foods Private Limited is a joint venture of three partners-PepsiCo Inc., USA(39.89 percent), Punjab Agro Industries Corporation Limited (36.11 per cent) and Volta’s Limited (24 per cent). The alarm bells in the offices of the two Rameshs-Vangal and Chauhan-started ringing loud and clear as soon as Rajan Pillai announced a joint venture with Coke on 22 October, last year.

Pepsi’s managing director, Ramesh Vangal, appears to have put up a brave face. Says Vangal: “I think Coke’s entry is healthy. It will stimulate growth. More importantly, it will depoliticise the industry, which has been extremely political. We have competed with Coke in 151 countries. We will compete with them in India as well.”

However, in spite of his determination to meet the challenge, Pepsi is ruffled. The company’s main disadvantage has been the strict terms and conditions, had agreed to when it entered the Indian market in September 1988. These contrast with the liberal terms granted lately to Coca-Cola, its representative complain.

For example, Britco, the joint venture of Rajan Pillai and Coca-Cola, will have no export commitment. As per the Britco proposal, it will only have any export target of Rs100crore by the tenth year of its operation. Against this, Pepsi has a commitment of exporting 50 percent of its total turnover each year.

The most unfair restriction, Pepsi laments, has to do with soft drinks. Pepsi just restricts its soft drink sector to 25 percent of its total turnover. Britco has no limit on soft drink sales. Instead, it has been set a soft drink sales target of 50 percent of its turnover, by the end of tenth year of operation.

A few months after the Coca-Cola proposal was cleared last October, Pepsi submitted a proposal to the government, asking for a revision of its original terms. Some of its suggestions were: increased equity capital; a change in its shareholding pattern; a revision of terms approval, in line with the new industrial policy; the use of brand names and trade marks of PepsiCo for products meant for domestic consumption and revocation of the restrictions on import of proprietary ingredients and allowing imports as per the import policy, enforced from time to time.

What does this mean in real terms? If the government agrees to the Pepsi proposal, then Pepsico Inc. (USA) will increase its equity from Rs9.97 crore to Rs35.48 crore. Voltas will increase its equity from 6crore to Rs 35.48 crore. But Punjab Agro will not increase its shareholding, which will remain at Rs9.03 crore. According to the new proposal, if Punjab Agro disinvests further, then PepsiCo Inc. will take up its disinvestments.

In addition, Pepsi has requested a 3:1 foreign exchange inflow-outflow balance. Earlier, it was 5:1 over a ten-year period. But most important was its application, asking for a revision of the 25 percent limitation on soft drinks, as a part of its total turnover. While the Foreign Investment Promotion Board cleared Pepsi’s proposal for expanding its share capital, the other terms and conditions have been referred to the food-processing ministry. Putting it plainly, Vangal says: “We would expect a level field between us and terms given to Coca-Cola.”

Official opinion in the food-processing ministry, however, is divided. Hardliners believe, Pepsi should live with the conditions it had agreed to. Others agree that Pepsi and Coca-Cola should be on equal footings. Vangal himself answers questions on why he is demanding new terms, by invoking the argument of the country’s liberalized economic regime: “It is like rupee convertibility. When the environment changes, the climate changes, every body gets the benefit of the new sunshine and rain.”

Pepsi is fighting a hard battle in the soft drink market, which is estimated at Rs1, 200 crore and which continue to grow.

The advertisement war is a reflection of the cutthroat battle for the 110 million case-per-year soft drink market. From Pepsi’s boast of ‘Yehi hai right choice baby’ to Parle’s invitation to ‘Taste the thunder’, soft drink jingles have become all too familiar to consumers. Promotional schemes have also been thrown in. Parle remains the leader, with over 55 percent of the market, as of 1991. Pepsi claims to have a market share of 20 percent.

Explains Vangal: “I think that the softdrink market in India has grown in value, mainly because the prices have gone up. The prices have gone up because of higher excise value and transportation costs.” He added: “The soft drink market has great potential, we will have to invest in things such as infrastructure. The soft drink industry is a great employment generator. Excluding the transport industry, the soft drink industry generates more employment than any other industry.”

Pepsi’s executives are confident and optimistic about the government decision on the new proposal that they have submitted. For the time being, the Pepsi Parle battle continues unabated, with both parties accusing each other of resorting to dirty games.

Unperturbed by allegations that he is using every trick in the book to violate the rules originally set for him (see interview), Vangal vows to carry on the war. “Our fight with our competitors in the market is not a personal war. This is a business war.” And he concluded with his favourite line: “And for Pepsi, all I would like to say is : ‘Yehi hai right choice baby

INTERVIEW
“Competition here, is looked upon as a threat”

Ramesh Vangal, managing director of Pepsi Foods, speaks about his company and the soft drink market in India

Thirty-seven-year old Ramesh Vangal, managing director of Pepsi Foos Limited, was a picture of confidence, as he sat behind his desk on the 11TH floor of the Mohan dev Building on New Delhi’s Tolstoy Marg. On a shelf behind him, sat the entire range of neatly packed Pepsi products- from shrimps to Basmati rice. A graduate of the Indian Institute of Technology (IIT), Powai, and the London Business School, Vangal has come a long way from selling soap in Egypt to selling food in India. Starting with a senior marketing post in Procter & Gamble, Vangal went on to take over as Pepsi’s first managing director. He faced a stiff challenge from another Ramesh then-Parle’s Chauhan-a battle that inspired countless stories and over 200 parliamentary questions on the American multinational. And even as the war between Parle and Pepsi rages on, another American giant, Coca-Cola, promises to add more fizz to the battle. But Vangal is determined to fight it out. Excerpts from an interview:

SUNDAY: What would you list as the achievements of Pepsi Foods Limited, since it was established in India in 1989?
Ramesh Vangal: Pepsi has achieved a great deal. In agro-processing, this year we will process 40,000 tones of food and vegetables, compared to the next highest processor, Wimco, who has an off-take of 15,000 tones. Nijjer Agro is a close third. There has been a considerable increase in Pepsi’s revenue and in the yield of the farmers, ever since we came in. The key contribution of Pepsi is in providing an integrated spectrum of technology from lab to factory to market. We should start not from the factory but from the market and go backwards to the land.

We have also made a major contribution in the export area. We have, in a short time, and despite many problems established an export machine. In fact we have been accredited the status of an export house.

Exports from India are difficult. Our focus has been on value-added exports. We are selling products into the Pepsi system, which is clearly incremental. We sell our agro products under the brand name of Seasons Harvest, abroad. We sell products that are designed to specifications. We are selling trucks with a body done up. We have an order worth Rs4 crore, made by Swaraj Mazda. They are not ordinary trucks, but made according to the specifications of Pepsi. We have a whole bunch of hardware items that we are selling to the Pepsi system.

In fact, recently we received a breakthrough order from a very usually quality-conscious Japanese company called Khagome, for 800,000 tones of tomato paste. Khagome is a regular supplier to Pizza Hut, which is a Pepsi Company. What I am saying is that the linkages are coming out, loud and clear.

Q: But it has been reported that Pepsi has failed to meet its export commitments. Pepsi is also alleged to have calculated its exports from all its actives, including exports of rice, shrimps and cashew nuts, and nut exports of selected products, as agreed to in the matter of intent.
A: It is the complex situation. There may be questions of interpretation. From my perspective, our interpretation is valid because we have exported products, which are incremental along the lines of our agreement. In any case, if you look it with in the contest of the new Industrial policy and the approval of products like Coca-Cola, the conditions we have agreed to are a lot broader and laugher. Categorically stated, we have complied with our obligations to the government. As far as we are concerned, we have not defaulted. We have exceeded our export obligations, both on company-manufactured exports and on the total export basis.

Q: Pepsi has claimed that its soft drinks turnover is only 25 percent of total turnover, although it is alleged that the figure is actually as high as percent of its total turnover.
A: Our percentage of soft drinks is only around 22 percent of the total turnover. I do not agree with what the critics allege.

Q: A section of people feel that you have resigned from Pepsi and you are in your way outâ€¦â€¦.
A: The newspaper reports about my resignation are not true. There are rumours, fast and furious, of my leaving Pepsi. At this moment, I have no plans to quit Pepsi. These things only serve to create concern and anxiety among suppliers etc.

Q: Why is Parle so upset over your entry?
A: A lot of Indian industries have been protected. Competition here is looked upon as a threat. And competition assumes many forms. The rest I will leave to you. If you look at the extent of press coverage, we probably had more press coverage than any other project in the country. Why all the fuss?

Q: Pepsi has reportedly been siphoning off huge amounts through “transfer pricing”, involving deals with a front company abroad that supplies machinery at inflated prices.
A: All this is absolute trash. Some newspapers have alleged that we have siphoned off Rs 50 crore. Our total imports are 10 crore in foreign exchange. If anything, our equity capital has been raised from Rs 25 crore to Rs 80 crore. Pepsi has pumped in an inordinate amount of money. The allegation is ludicrous. Comparative interests find it cheaper to fight outside the market.

Q: Rajendra Dara, in his book The Real Pepsi, The Real Story, has alleged that Pepsi has resorted to shady deals.
A: As far as he is concerned, I do not want to dignify his comments with an, answer, because I do not want to dignify rubbish.

Q: Pepsi has been accused of adopting a dubious split-price mechanism to evade excise duty. The cost of concentrates has been split into two components-basic cost and royalty. Since no excise duty need be paid on royalty, Pepsi is able to pocket that component of the cost. Franchises too, benefit, as they are required to pay excise duty only on basic cost.
A: Is royalty illegal? The concept of royalty exists in every business. And what we are charging, is a small amount of royalty.

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